Thursday, December 27, 2012

Why Nations Fail

One of the most recently hyped books on the political economy, Why Nations Fail - The Origins of Power, Prosperity, and Poverty by Daron Acemoğlu and James Robinson tries to explain why some nations grow rich while others fail their citizens. Reviews abound (Dan Drezner, William Easterly, Martin Wolf), my addition to these luminaries weighing in would hardly seem to matter at the margins even.

I will try but little then. Robinson and Acemoglu put forward a very interesting argument showcasing how institutions - political and economic ones - determine long-term growth and in that sense are to belie the performance of nations/states. Neither culture, nor religion, nor even geography matter to the same extent and with the same durability and importance as to the authors. It's a very convincing argument devoid of the old cultural, xenophobic, racist, or even geopolitical prejudices. In order to generate and most importantly sustain long-term economic growth countries were in need of inclusive institutions, which the authors juxtapose with the extractive institutions present in far too many African or even Asian or South American states.

In more detail:

Extractive institutions ... have a powerful logic: they can generate some limited prosperity ... while distributing it into the hands of a small elite. For this growth to happen, there must be political centralization. ... The growth generated by extractive institutions is very different in nature from growth created under inclusive institutions ...most important, it is not sustainable. By their very nature extractive institutions do not foster creative destruction and generate at est only a limited amount of technological progress ... [also] strong incentives for others to fight to replace the current elite. Infighting and instability are thus inherent features of extractive institutions. The fear of creative destruction is the main reason why there was no sustained increase in living standards.